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New role-models for mid-size companies

mittelstand column More than 90% of enterprises in the Arab world can be considered small and medium-sized enterprises. The growing importance of small and medium-sized firms requires a need to help those enterprises and to develop sustainable growth, networks for change and management development.

In this column I will introduce new role-models for small and medium-sized companies. An emerging role-model for medium-sized companies is Germany with its more than three million enterprises of this size. What can we learn of them? Which success stories are relevant? How can policy makers support them? And what does it mean for a society when the economy is more based on a variety of companies than dominated by big groups?

If you take a quick survey of those German small and medium-sized companies, you might observe something that has escaped the radar of the global media and management circus. If you visit one of the more than five thousand “Mittelstand” champions of German industries coincidentally, you might meet a German engineer with a foreign flag guiding an overseas management delegation. It happened to me twice this week. What’s going on here? If you ask the German SME associations and lobbyists, it’s the same scene. Every month they receive a couple of delegations of politicians and lobbyists from China, India, Korea, Iran, Egypt, Algeria or Brazil who hope to learn from German Mittelstand companies.

 Since 2007-08 the models of management are in a  state of evolution. The old models were mostly more short-term orientated, more centralized, more hierarchical, less dialogue-orientated and less regulated by the government. In the decades before the crisis, the pendulum of economic contradictions swung to short term profit that imbalanced the  society. The life expectancy of an enterprise sank. Ten years ago, economic Nobel price winners calculated the probability of a Great Depression like that of 1929 with a prospective risk of one to some millions.

 The practitioners of management have known that when it comes to crises, there is a difference between theory and practice. In the last few years, managers have observed the increasing failure and the helplessness of the so called experts in economic theory, management theory and financial theory.

Managers are more and more attracted by the alternatives of good management and management education beyond the models of business schools and of MBA approaches ‘that train the wrong people in the wrong ways with the wrong consequences’ (Henry Mintzberg). Managers are looking for new role models which are more balanced and based on the practice of the profession on a daily basis. Lots of them are attracted now by the German economy.

It was observed that during the 2009-10 economic crisis, German industries  coped up better than many other industrial countries. Perhaps for the first time, managers from all over the world learned that the German success story is based mostly on humdrum capitalism and a more patient capital. It is based mostly on its medium-sized, but globally orientated companies. These so-called “hidden champions” embody the heart of the German economy—much more than all the well-known German big industrial brands. If we look at the Fortune 500 list, the big German companies,  compared to other countries such as US or even China, are below average. Germany doesn’t have many big companies with a global perspective. They have some – but related to the size of their economy much less than France, the UK or Japan and much less than the US.

 The strength of the German economy is its Mittelstand. Almost 50% of around 3,000 existing global hidden champions are located in Germany (Hermann Simon). Business historians have recognized the influence of small and medium-sized companies on Germany’s economic growth since the late 19th century. Many of those enterprises have been export-orientated from the beginning and helped to create a balanced economy with a very diversified and decentralized structure. There are over 340,000 Mittelstand companies in Germany that are active in export and 4,400 family businesses have a turnover of more than 50 million euro.

Next: Success factors of German Mittelstand Champions